HFS Could Strengthen Avis

<H1>HFS Could Strengthen Avis</H1>By Lynn Woods

<I>Parsippany, N.J. </I>- The purchase of Avis Inc. by HFS Inc., the enormously successful franchise hotel and real estate company, is likely to change the industry in ways that could result in a stronger business.

"It's been a long time since a major company that's not automotive-related, or anyone other than an automotive executive, has gone in and acquired a car rental company," said Neil Abrams, president of Neil Abrams Associates, a car rental consultancy in Purchase, N.Y. "This industry needs new blood."

"The car rental industry has needed something like this for a while," agreed Jon LeSage, executive editor of <I>Auto Rental News</I> in Redondo Beach, Calif. "There's a need for new ideas and healthy competition, not just rate wars."

HFS isn't the only buyer to have stepped onto the stage this summer. Several weeks ago, the Ford Motor Co. announced that it was acquiring all the common stock of Budget Rent A Car-confirming its faith in the future of the firm, which has lost money in recent years.

Under the terms of the HFS deal, which is expected to be completed in the fourth quarter of this year, the hotel franchiser will purchase Garden City, N.Y.-based Avis for $500 million in cash and approximately $300 million in HFS common stock. The company will then be split into two entities.

A new publicly traded company, Avis Rent A Car, will be spun off to HFS shareholders. It will serve as a franchisee of HFS and will consist of Avis' 800 corporate-owned locations, its fleet of about 175,000 cars and other car rental operations. As such, it will be different in scale but not kind from Avis' existing franchisees, which account for the company's remaining 480 locations. The arrangement would not be dissimilar from the licensee relationship Avis Europe has had to Avis, said a company spokesperson.

The second entity, Avis Inc., will become a wholly owned subsidiary of HFS and will license the Avis name to Avis Rent A Car. WizCom InternationaI Ltd., Avis' computer reservations company, which generates millions of dollars of revenue on its own, also would become a subsidiary of HFS.

Joseph V. Vittoria, Avis' chairman and chief executive officer, will serve as chairman of both companies. Roughly 90 percent of Avis' 13,000-person work force will be employed at Avis Rent A Car, while the remaining 10 percent will report to Avis Inc.

Employees Must Approve

The transaction is subject to the approval of U.S. Trust, the trustee representing members of Avis' Employee Stock Ownership Plan, which owns 71 percent of the common stock, and General Motors, which owns the remaining 29 percent. Under the agreement, all Avis employees would become fully vested at the time of the sale and receive $35 per share. One-third of employees are now vested, and allocated shares are worth $12.51. When the ESOP was formed in 1987, the value of the stock was $5.22.

Vittoria said that before the sale took place, Avis was bracing for added financial pressures in 1997 as the ESOP entered its 10th year. At that benchmark, employees who had been with the ESOP since its inception and who were 55 or older would be allowed to withdraw 25 percent of their holdings, which the company would have to buy back. "This would have put a financial burden on the company, since a lot of our people are 55 or older," Vittoria said.

Along with the financial windfall, Vittoria alluded to other benefits. "We should be able to get synergies out of our relations with HFS given their large reservation system, where we can utilize their pricing with AT&T," he said. HFS has a 10-year agreement with AT&T to provide telecommunications services to HFS and its franchisees at a discount-one of many of HFS' preferred vendor agreements.

In addition to WizCom's computerized hotel and car rental reservations systems, Avis brings to HFS its own highly sophisticated computerized system. "HFS will gain quite a bit from Avis' management information system," said William Reiter, CEO of Reiter Associates Consulting, a car rental consulting firm in Miami.

Henry R. Silverman, chairman and CEO of Parsippany, N.J.-based HFS, has mentioned several ways in which Avis could be cross-marketed with other HFS brands. Travelers could book Avis cars through hotel reservation numbers or at desks located in its hotels; families relocating and buying a new home could book a car through HFS' real estate agents; and the more than 150,000 real estate agents at HFS franchises could purchase or lease Avis cars at a discount.

Under HFS, Avis probably will gain more franchised locations. "I believe HFS would grow franchising, just as we intend to do, but that does not include any of the locations which are corporate today," said Vittoria, adding that the sale would not affect Avis' corporate contracts. Nonetheless, a few corporate buyers were jittery at the prospect of Avis as a franchised organization.

"If they turn all their locations into franchisees, it's a concern of mine," said Frank Cusick, corporate controller at Cascade Communications, a Westford, Mass., manufacturer of telecommunications switches that uses Avis as its preferred car vendor.

Tom Barrett, travel and fleet manager at National Starch and Chemical Co., in Bridgewater, N.J., said that "whenever you look at a car rental bid, you look at the number of non-corporate participating locations." Avis' major franchisees, which operate in Las Vegas, San Diego, Dallas/Fort Worth and Los Angeles, provide seamless service to corporate customers because the franchisees participate in Avis' corporate program. But that is not the case in some second-tier cities, he said.

Before long, another car rental company is expected to join the HFS fold. Silverman has stated his interest in consolidating the car rental industry. Jane Baxter Lynn, HFS' vice president of corporate communications, confirmed that HFS was talking to other rental companies.

Acquiring another car rental company would fit with the HFS formula: snapping up a group of companies in one industry and franchising the brand names, thereby overseeing the marketing but not the operations of each. It's a strategy that's proven to be tremendously successful: HFS stock is worth about $62, up from $16 in 1992. HFS owns nine hotel chains, including Howard Johnson, Days Inn and Ramada, and in the past year purchased three national real estate franchisers.

All in all, the HFS purchase will benefit everyone, according to Abrams.

"HFS will take a good look at how the fleet is utilized, and they'll build a strong entrepreneurial program to give operators what they need to succeed," he said. "It's good for travel agencies and customers because of HFS' ability to pull together synergies of hotels and car rentals. Travel managers might have the ability to do some interesting programs with their employees. The possibilities are endless.